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Which Is Better: Cash-Out Refinance vs. HELOC?

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When you need cash but don’t want to raid your emergency fund, it’s only natural to consider tapping into what could be your greatest source of wealth — your home equity.

It’s entirely up to you how you use it, but many consumers use home equity to remodel their homes, consolidate debt or cover expensive bills, such as college tuition. It’s your equity to use how you please, so the options are endless.

But because there’s more than one way to access your home equity, it’s wise to compare available options to find the right fit. Two of the most popular ways are a home equity line of credit (HELOC) and a cash-out refinance. Both of these loans can work if you want to access your home equity, but they do work rather differently.

Cash-out refinancing: How does it work?

Cash-out refinancing involves replacing your current home loan with a new one. The “cashing out” part of the equation requires you to take out a larger home loan than you currently have so you can receive the difference as a lump sum. Like HELOCs, this strategy works for people who have equity in their homes due to paying down their mortgage balances or appreciation of their property.

To qualify for a cash-out refinance, you need to meet similar requirements as you would if you were applying for a first mortgage. This typically means having a credit score of 620 or above, a debt-to-income ratio of 50% or less (i.e. the sum of all your debt payments, including housing, divided by your gross monthly income), and a loan-to-value ratio on your home of 80% or less after the cash out refinance is complete.

The equity part of the equation can be a roadblock since you need to have a lot of equity in your home to qualify for a cash-out refinance. Let’s say your home has a value of $300,000 and you want to take cash out. In that case, you could only borrow up to $240,000 through a cash-out refinance. If you owe that much or more on your home already, you wouldn’t qualify.

Like any other loan, you’ll need to prove your employment status via recent pay stubs and gather other documentation such as W-2 tax forms, two months of recent bank statements and two years of tax returns.

Cash-out refinance pros and cons

Pros:

  • You can use the money from a cash-out refinance for anything you want, including home upgrades, college tuition, a vacation or debt consolidation.
  • If rates have gone down or your credit has improved since you took out your original home loan, you could refinance your mortgage into a new loan with a lower interest rate.
  • You can choose from different types of loans for your refinance, with various terms and fixed or variable rates available.
  • Interest on your first mortgage may be tax-deductible.
  • Interest rates on first mortgages tend to be lower than other options, such as home equity loans or HELOCs.

Cons:

  • You may face substantial closing costs for a cash-out refinance, which typically work out to 2% to 6% of the loan amount.
  • If interest rates have gone up since you purchased your home, you could be trading your mortgage for a higher interest loan that will be more expensive.
  • Refinancing your home to take cash out may leave you in mortgage debt longer.
  • You won’t qualify for a cash-out refinance unless you have at least 80% equity in your home after the process is complete.
  • Refinancing your home to take cash out could leave you with a larger monthly mortgage payment.

Home equity line of credit (HELOC): How does it work?

While a cash-out refinance requires you to replace your current mortgage with a new one, a HELOC lets you keep your first mortgage exactly how it is. Acting as a second mortgage, a HELOC lets you borrow against your home equity via a line of credit. This strategy allows you to withdraw the money you want when you want it, then repay only the amounts you borrow.

To qualify for a HELOC, you need to have equity in your home. The Federal Trade Commission (FTC) notes that, depending on your creditworthiness and how much debt you have, you may be able to borrow up to 85% of the appraised value of your home after you subtract the balance of your first mortgage.

For example, let’s say your home is worth $300,000 and the balance on your mortgage is currently $200,000. A HELOC could make it possible for you to borrow up to $255,000, because you would still retain 85% equity after accounting for your first mortgage and your HELOC.

Generally speaking, HELOCs work a lot like a credit card. You typically have a “draw period” during which you can take out money to use for any purpose. Once that period ends, you may have the option to repay the loan amount over a specific amount of time or you might be required to repay the balance in full. You may also have the option to renew your draw period at that time. All these factors can vary, so make sure to ask your HELOC lender about specifics before you move forward.

Like credit cards, HELOCs also tend to come with variable interest rates. This can be a good thing when rates are low, but you have to be prepared for your rates to rise.

To qualify for a HELOC, you must be able to borrow the money you need and still maintain 15% equity in your home. Having a credit score of 680 or above can also help the process along, although some lenders offer home equity loans to borrowers with scores as low as 620.

Generally speaking, you also need to have a debt-to-income ratio of less than 43%, including your first mortgage and your HELOC payment. The Consumer Financial Protection Bureau (CFPB) reports that lenders implement this “43% rule” based on the idea that borrowers with higher levels of debt often have trouble keeping up with their housing payments.

HELOC pros and cons

Pros:

  • Applying for a HELOC allows you to maintain the terms of your original mortgage, which can be an advantage if your rate is low.
  • You can use money from a HELOC for anything you want, and you only have to repay amounts you borrow.
  • HELOCs tend to come with lower closing costs than traditional mortgages and home equity loans.
  • Interest may be tax-deductible if you use the funds to improve your property. Make sure to check with your accountant.

Cons:

  • Taking out a HELOC means you’ll need to make two housing payments every month — your first mortgage payment and your HELOC payment.
  • Interest on a HELOC is no longer tax-deductible, unless the funds are used for acquisition or updating your home.
  • Since you only repay what you borrow and the interest rate on HELOCs is typically variable, you may not be able to anticipate what your monthly payment will be. Your monthly payment could also be interest only at first, meaning your payment won’t go toward the principal or help pay down the balance of your loan.
  • The interest rate on HELOCs tends to be higher than first mortgages, and their variable rates can seem riskier. You may also be required to pay a balloon payment at the end of your loan, so make sure to read and understand the terms and conditions.
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At a glance: Cash-out refinancing and HELOCs

At the end of the day, either borrowing option can get you what you need — access to the equity in your home. But, one option can easily be better than the other, depending on your situation.

Before you choose between a HELOC or a cash-out refinance, here are all the details you should consider:

 

Cash-out refinance

HELOC

Loan term

You get to select the loan term when you go through a cash-out refinance. Among other options, you can get a fixed-rate mortgage with a 15-year or 30-year term.

Most HELOCS come with a draw period of up to 10 years. After that, you will have a repayment period that varies by lender.

Borrowing limits

You can borrow up to 80% of your home’s value.

HELOCs allow you borrow up to 85% of your home’s value, including your first mortgage.

How long it takes to get the money

The average refinance takes between 20 and 45 days, and you’ll get a lump sum for the amount you borrow at closing.

The average HELOC can close in less than 30 days, at which point you’ll have access to your new line of credit.

Credit score

You need a credit score of 620 or higher to qualify for a cash out refinance.

You need a credit score of 620 or higher to qualify for a HELOC.

Equity requirements

You need to have at least 20% equity in your home after the cash-out refinance is complete.

HELOCs require you to maintain at least 15% equity after borrowing.

Interest rates

Mortgage rates can be fixed or adjustable, with rates ranging from 3.75% to 4.25%.

HELOC interest rates are variable, currently ranging from 4% to 5.87%.

Closing costs

Closing costs for a traditional mortgage range from 2% to 6% of the loan amount.

HELOCs tend to have little or no closing costs.

Risks

Since you’re using your home as collateral, you run the risk of losing your home if you default. If you extend your repayment timeline, you will also spend more time in debt.

HELOCs require a lower amount of equity (15%) in your home, which means you can borrow more. However, you could lose your home if you default, because you’re using the property as collateral.

Which choice is right for you?

Before you decide between a HELOC or a cash-out refinance, it helps to take a holistic look at your personal finances and your goals.

A cash-out refinance may work better if:

  • Your current home loan has a higher rate than you could qualify for now, so refinancing could help you save on interest
  • You prefer the stability of a fixed monthly payment or only want to make one mortgage payment every month
  • You have high-interest debts and want to consolidate them at the same rate as your new mortgage
  • What you save by refinancing — such as savings from a lower interest rate — outweighs the fees that come with refinancing

A HELOC may work better if:

  • You are happy with your first mortgage and don’t want to trade it for a new loan
  • Your first mortgage has a lower interest rate than you can qualify for with today’s rates
  • You aren’t sure how much money you need, so you prefer the flexibility of having a line of credit you can borrow against
  • You want to be able to borrow up to 85% of your home’s value versus the 80% you can borrow with a cash-out refinance

In addition to these options, you can also consider a home equity loan. While HELOCs come with variable rates and work as a line of credit, a home equity loan comes with a fixed rate and fixed monthly payment.

Whatever you decide, make sure to compare lenders, interest rates and terms to get the best deal possible when accessing your home equity.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Holly Johnson
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Holly Johnson is a writer at MagnifyMoney. You can email Holly here

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Condo, House or Townhouse: Which Is Best for You?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Buying a home allows you to choose a residence that fits your lifestyle.

Should you buy a house in a suburb or a historic downtown? What about a condo within walking distance of a train station? Or maybe a townhouse in a new urban infill community?

Whether you’re a first-time homebuyer or are looking for a second home, choosing between a condo, house or townhouse requires you to consider location, maintenance and price. The good news is these housing styles have some overlap, so choosing one over the others may involve less sacrifice than you might expect.

What’s the difference between a condo and a townhouse?

Condominiums — called condos for short — are a kind of ownership, while townhouses and houses (stand-alone structures that most people would consider traditional, single-family homes) refer to physical structure styles.

Condos

Condos can come in a variety of shapes and sizes, though they are often similar in size and appearance to an apartment. At the same time, some condos can be quite expansive. They typically are private residences that are part of a building of multiple-unit communities, although some detached condominiums are available. Condos are occupied by an individual or a family and are often found in urban areas where land for construction is scarce.

Condos can also come in many configurations beyond apartment-style buildings, said Mark Swets, the former executive director of the Association of Condominium, Townhouse, and Homeowners Associations — “Condos have less restrictions. They can be converted from old office buildings or loft space.”

Regardless of their location or size, condo owners share ownership of common areas and facilities that are maintained by a board comprised of members elected from the condo community. The board collects dues from the community’s condo owners and uses the money to maintain and operate common areas and amenities, like community pools, gym facilities and landscaping.

Townhouses

Townhouses typically are vertical, single-family structures that have at least two floors and must be separated by at least one ground-to-roof wall with any other residence that may be attached to it.

Townhouses, which are individually owned, can be lined up in a row or arranged in a different configuration. Owners buy both the structure, including its interior and exterior, and the piece of land on which the townhouse is built, which may include a small yard.

In some cases, townhouses may be classified as condos. The way they’re categorized depends on what’s outlined in the declaration and bylaws for each association, Swets said.

Comparing condos, townhouses and houses

To help you decide which house and ownership type is best for you, we’ve highlighted comparisons as we look at condo versus townhouse, house versus condo and townhouse versus house.

Condo vs. townhouse

Benefits

Risks

Condos and townhouses both offer the opportunity to get to know neighbors and build a strong community and walkable amenities such as a pool or clubhouse, with generally less maintenance than a house. Condos may offer a variety of extra features, with new developments providing luxury conveniences such as rooftop bars, doormen and catering kitchens.Condo and homeowners association (HOA) fees can be expensive, and you’re trusting the HOA or condo association to provide satisfactory upkeep of the property. Condo fees tend to be higher than townhouse HOA fees — as much as several hundred dollars more — because condo associations typically provide more maintenance and amenities, and they can charge owners extra fees to pay for one-time facility expenses.

House vs. condo

Benefits

Risks

While condos offer a range of amenities and maintenance for the exterior of the property, owning a single-family home frees owners from the rules and restrictions of condo ownership. Buyers looking for privacy, a rural or suburban lifestyle or a larger property will have more options with a single-family house.Owning a single-family home means that the owner must pay for damage and upkeep to the interior and exterior that insurance doesn’t cover. Condo associations are liable for the exterior property and, if stated in the bylaws, “common elements” such as the roof and windows.

Townhouse vs. house

Benefits

Risks

Owners of both single-family houses and townhouses own their units, giving them freedom to improve and renovate as they see fit — within any guidelines for changes set by HOAs.Single-family homeowners assume responsibility for their property. Townhouse owners may not be liable for repairs, upkeep or incidents that occur outside their unit or the land on which it sits, depending on their HOA.

How to choose between condos and townhouses

Here are some factors to consider when deciding on what kind of residence to buy.

Maintenance

A single-family house gives you the freedom to fix up or renovate as you please, but you’re also responsible for repairs and maintenance. As a condo owner, the monthly fee you pay to a board or association may take care of maintenance such as mowing, exterior repairs and snow shoveling. Townhouse HOA fees may include maintenance of the community’s common areas, such as a shared backyard or playground, but that’s not always guaranteed.

“If I were to look at a condo, it would be because I didn’t want to worry about the maintenance outside,” said Lori Doerfler, immediate past president of the Arizona Association of Realtors. “If I wanted to have a piece of land but not a lot of yard, a townhome would be a good choice.”

Location and lifestyle

Condos, townhouses and stand-alone houses can offer a wide range of lifestyles and locations. Homebuyers should think through whether they’re interested in an urban, walkable lifestyle, a suburban neighborhood or something in between. Where you live also will determine your commute to work and proximity to family and friends.

Ownership restrictions

While condos can offer convenience and amenities, they also come with monthly dues and occasional assessment fees for special community projects, such as clubhouse repairs, and property rules, which can be strict. Single-family homes, especially those in neighborhoods without a homeowners association, have few or no restrictions.

Buyers should always check the community’s bylaws to understand the rules.

“I always want to get the covenants, conditions and restrictions to the buyer,” Doerfler said. “They describe the requirements and limitations of what you can do with your home as well as the grounds.”

Monthly fees

Any type of dwelling may come with a monthly fee to help pay for upkeep of the community’s amenities, which might include a gym, pool, clubhouse access and landscaping. Owners of a single-family house in a neighborhood with a homeowners association will pay monthly or annual HOA fees, and condo and townhouse owners will likely pay fees every month to their community board or association.

HOA fees typically can range from about $200 to $300 a month; other factors may contribute to how much the fee will be, like your location, unit size and available amenities. Monthly condo association fees can go as high as $700 or more, also depending on the amenities and services provided.

When factoring your monthly mortgage payment, be sure to add in the HOA or condo association fees to determine how much you’ll pay to live in the dwelling. Fees could significantly increase your cost, putting a seemingly affordable home out of reach.

Lending and price

Where you live will determine the price that you’ll pay for your home. Homes in desirable locations, such as a lively downtown area or a neighborhood with a good school district, can cost significantly more than homes with a long commute to a city.

Interest rates vary by lender and location, so it’s important to comparison shop with multiple mortgage lenders before making a decision.

Another consideration for each dwelling type is its resale value. It’s helpful to research resale information for similar homes in the community or neighborhood, and make a note of how long those properties were on the market before they were sold. You should also keep in mind that association fees could have an impact on whether a home is resold.

The bottom line

Your decision to buy a condo, house or townhouse should depend on:

  • What you can afford
  • How much maintenance you’re OK handling
  • Where you want to live
  • The type of community in which you want to live

For example, a family with kids may want a house with a big yard near a good school, while a single professional may be more interested in a downtown condo within walking distance to the office and nightlife.

As you consider which dwelling to buy, be sure to include the costs of condo or HOA fees in your housing expenses to determine whether your new home fits your lifestyle and your budget.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Marty Minchin
Marty Minchin |

Marty Minchin is a writer at MagnifyMoney. You can email Marty here

Crissinda Ponder
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Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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Why Lying On Your Mortgage Application Just Isn’t Worth the Risk

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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It’s been more than a decade since the housing meltdown when “liar loans” were frighteningly common, and unfortunately the number of borrowers who lie on their mortgage applications is on the rise yet again.Leading up to the housing crisis, unethical housing professionals took advantage of loan programs that didn’t require income or asset documents, and encouraged borrowers to lie on their applications to meet the approval guidelines. That often meant pushing homeowners and homebuyers to borrow more than they could afford.

The Dodd-Frank Act of 2010 all but eliminated liar loans in the aftermath of the housing bust, but that hasn’t stopped lying on applications from making a comeback. The crime committed when lying on a home loan application is called mortgage fraud, and with new laws making it punishable with jail time and million dollar fines, it just isn’t worth the risk.

Why people lie on mortgage applications

There are a number of reasons someone might lie on a mortgage application. The two most common are fraud for housing and fraud for profit. We’ll discuss what each is and provide some examples of how they might work.

Fraud for housing

This type of fraud is related to consumers that make up or inflate information on some part of their loan application to get a home, or keep the home they have. Examples might include convincing an employer to write a “new job letter” with a salary made up to qualify, or trying to persuade an appraiser to come in at a particular value to support a cash-out refinance.

The primary motivation for this type of fraud is to either buy a home, or access some of the equity that has been built up on a home. Home equity is the difference between what your home is worth, and the balance of any mortgage financing.

Fraud for profit

Industry insiders such as real estate agents, loan officers, attorneys, appraisers and even title companies are usually the perpetrators of fraud for profit. They use the entire loan process to steal cash and equity from both lenders and homeowners. Because of the sheer magnitude of economic damage fraud for profit schemes do to local housing markets, the FBI focuses most of its resources on them.

In some cases, home buyers may be part of a real estate fraud scheme involving real estate agents, mortgage loan officers or appraisers to acquire multiple properties in a short period of time, with the intent to immediately flip them for sale at a profit. In more sophisticated fraud rings, sellers may buy and sell houses within a certain area to artificially drive up values.

Unethical loan officers or real estate agents may try to convince inexperienced real estate investors to participate in these schemes, and in many cases they may indicate that there is no harm in a little white lie. But mortgage fraud is mortgage fraud, and you don’t want to be on the other side of the law if the FBI begins scrutinizing an application.

We’ll explore the most common types of mortgage fraud, based on recent reports and studies by Fannie Mae and Corelogic.

Seven common lies on mortgage applications

Lies on a mortgage application don’t just include things like stating you make more money than you actually do, or that you received a gift from someone who isn’t really related to you. You can also commit fraud by leaving off information like properties you own with no loans on them.

Corelogic issued a Mortgage Fraud Report in 2018 listing the most common types of fraud being found on loan applications. Although they are ranked based on how frequently they occur, any type of mortgage fraud is considered a federal crime, and will put the applicant at risk of prosecution.

Lies about your income

If you’re misrepresenting how much income you make or embellishing your employment history to try to get approved for a mortgage, you’re committing income fraud. Your income carries a lot of weight when a lender is determining whether you’ll be able to repay a mortgage loan. In fact, your debt-to-income (DTI) ratio, a measure of how much debt you have compared to your pre-tax income, is just as important as your credit history.

Your employment history is also important, and lenders prefer that you have at least a two-year history of earnings at your current job, with steady pay and no gaps in employment. However, you can get a mortgage if you’ve just started a job, or have recently received a large raise.

Dishonest borrowers and their employers may generate job letters with inflated starting salaries, or showing a large raise with manufactured paystubs. The income allows them to meet the DTI requirements on houses they otherwise wouldn’t be able to afford.

The number of applications with evidence of income fraud rose more than another type of mortgage fraud according to Corelogic’s mortgage fraud report in 2018.

Lies about living or not living the home you’re buying

Occupancy fraud is when the applicant lies about how they plan to occupy the property to take advantage of lower interest rates or down payment requirements. When you fill out an application you indicate how you will occupy the property you are buying or refinancing. You may choose to live in the property as a primary residence; on occasion as a second home (commonly called a vacation home); or as an investment property that you intend to rent out to tenants to earn income.

Interests rates and down payment requirements are the lowest on primary residences, which may motivate an applicant to lie about living in a property, even if they are really going to rent it out.

Another example of occupancy fraud involves buying an investment property, but indicating it is a second home to get better rates and make a lower down payment. This is most common with out-of-state buyers who may eventually plan to retire in the location they are buying, but rent the property out until they reach retirement age.

Lying about an investment property you actually plan to live in is called reverse occupancy fraud. Current lending guidelines allow you to qualify for a mortgage using the market rent on a property you are buying as an investment property.

Buyers with a lot of liquid assets, but very little income, may commit reverse occupancy fraud so they can get the benefit of the rental income on the property they are buying to qualify.

Lies about who is benefiting from the transaction

Transaction fraud arises when one or more parties to a purchase or refinance transaction lie about why they are getting a mortgage, or try to influence people with cash or profit incentives to buy a property on their behalf.

When you buy a home, you typically sign a purchase contract agreeing to a sales price, and costs associated with the sale of the property. Everyone involved in the transaction has to agree to how much they will be paid, and disclose whether they are related to anyone who is buying, selling or representing a buyer or seller. If the parties agree to terms they believe are fair, and there is no relation either by business or family, that would be considered an “arms-length” transaction.

Lenders do allow financing on non-arm’s length transactions, but scrutinize them to make sure all the parties are working in each other’s best interests.

Reverse mortgages fraud is a type of transaction fraud that has been on the rise as reverse mortgages have risen in popularity. A reverse mortgage allows a senior citizen to access equity in their home in a lump sum, or to create monthly income and does not require a monthly payment.

A child or unscrupulous loan officer might convince an aging parent to take out a reverse mortgage with promises of investing the money, or offer them a large commission or bonus for buying a house with a reverse mortgage. The predators in these schemes are usually trying to earn large commissions, or take the cash from the reverse mortgage proceeds, and the seniors may not even be of sound mind to understand they are being taken advantage of.

Lenders perform thorough checks of contracts and parties involved, and may require higher down payments, or flat out deny a loan if they believe a non-arm’s length party is trying to coerce the borrower to take out a mortgage.

Trying to convince an appraiser to lie about a home’s value

When a home is placed for sale, the seller provides certain disclosures about the condition of the property and real estate agents agree on a fair market value. An appraiser is hired to inspect the property and determine if the agreed upon price is fair based on the recent sales of similar homes nearby.

Before the housing meltdown, lenders, borrowers or real estate agents could pick any appraiser they wanted. Unfortunately, as the housing market heated up during the boom years, appraisers were chosen based on their ability to “hit a value,” which lead to sales at inflated prices.

When the housing market collapsed in 2008, many of these homes dropped in value rapidly, resulting in loan balances being higher than their market value. This phenomenon was called “being underwater,” and resulted in a high rate of foreclosures, as homeowners found themselves with homes that were worth thousands, if not hundreds of thousands, less than their loan balances.

To prevent this problem in the future, the government passed appraisal independence requirement laws that require lenders use a random rotation of appraisers. Many lenders now employ appraisal management companies with a roster of dozens of appraisers in different housing markets, and lenders, borrowers and real estate agents risk regulatory and legal action for attempting to influence an appraiser’s opinion of value.

Not disclosing other real estate you own

Many borrowers mistakenly assume if they own real estate with no mortgage they don’t have to disclose it on the application. In other cases, they may intentionally leave the property off of their application so they are eligible for first time homebuyer programs.

Whatever the reason, this is a form of fraud, and could result in a loan denial, even if the loan is initially approved. Lenders perform a series of quality control measures, which include checking national public records databases to be sure your name or social security number are not tied to ownership of a real estate anywhere else.

Even if you don’t have a mortgage on a property, you are responsible for paying property taxes, and in most cases maintaining homeowner’s insurance. Lenders will take the annual amounts and divide them by twelve, and count the monthly payment against you when you are qualifying for a new loan.

Many of these quality control tests are done right before closing, so it’s just not worth lying on your application by omitting real estate you own, because you could end up with an 11th hour closing crisis, or worse a declined loan.

Stealing someone else’s identity to get a mortgage

According to a study by Javelin Strategy in 2017, a research based advisory firm, 16.7 million people in the U.S. were affected by some form of identity theft in 2017. Examples of identity fraud include manufacturing a social security number, or using someone’s — such as an elderly parent’s — identity to obtain a home loan.

Given how long the average loan process takes and how intensive the identity checks are, it’s the rarest form of mortgage fraud. However, if you have an elderly parent, and they indicate that they are receiving notices about past due credit that they never opened, you may want to take action immediately to determine if someone is testing the waters with their identity information.

Lying about the source of down payment funds

One of the first red flags a lender will look for on your bank statements is large deposits. Lenders want to know where the funds for your down payment came from for a few reasons.

The first is, they want to make sure a third party is not providing funds as part of a straw-buyer scheme. A straw-buyer is usually someone with good credit and stable income, and is paid a fee to take out a mortgage on a home they don’t intend to live in, or make payments on.

The buyer may be given the down payment in cash, or as a gift by fraudulently filling out a gift letter indicating a family relationship with the buyer. Because lenders don’t generally request proof of relationship with gift funds, this type of asset fraud is hard to track, and may not be discovered unless there is a fraud investigation later.

To avoid having to document a large cash deposits, more sophisticated straw buyers schemes may involve mortgage lenders producing forged bank statements. The straw buyer may also be given small amounts of cash by a real estate agent or investor to deposit over time, making it look like they are saving up for the down payment themselves.

The other red flag with large deposits has to do with money laundering. According to a report from Accuity, a global risk insurance company, real estate money laundering schemes reached $1.6 trillion a year across the globe.

Crime syndicates and drug cartels try to make their businesses look legitimate by using the funds derived from illegal activities to make “normal” purchases, such as buying real estate. Anti-money laundering measures are designed to scrutinize any funds used to buy and sell real estate, and watch for patterns of deposits that would indicate an individual is trying to stay just under the threshold for cash deposits that might trigger a money laundering investigation.

Why it’s not worth it to lie on a mortgage application

There are a number of reasons you should avoid lying on an application. The consequences are severe, and laws passed since the housing crisis deal more harshly with incidences of mortgage fraud than in past years.

You could go to jail and be fined

Under current U.S. federal and state laws, a conviction for mortgage fraud could result in a 30-year federal jail sentence, and up to $1 million in fines.

Your loan could be called due

If a lender finds that you committed fraud, they have the right to call the entire loan balance due. If you are unable to sell the home, you could end up with a foreclosure, and the lender could sue you for any losses they incur on the resale.

Your employment options could also be severely limited in the future. Businesses take financial fraud very seriously, especially when they are making hiring decisions. If you have a conviction on your record for any type of mortgage-related fraud, your ability to get a job could be severely limited.

Financial service employment will be virtually impossible, and employers may not consider you for any position that puts you close to a source of money, even if it’s just running a cash register at a convenience store or using a computer system to input food orders at a restaurant as a waiter.

What to do if you spot fraud in your neighborhood

If someone has asked you to lie on a loan application, or you know someone in your neighborhood who has indicated that a “little lie” won’t hurt anyone, you should be aware of the proper authorities to contact. The cost of mortgage defaults due to fraud is often paid by homeowners in the neighborhood when the loans inevitably default once the scheme is discovered by authorities. In large scale mortgage fraud rings, like the ones that occurred during the housing meltdown, taxpayers can end up on the hook for bank bailouts.

You can take action by contacting the following agencies to prevent or investigate mortgage fraud:

U.S. Department of the Treasury Financial Crimes Enforcement Network: Provides information and resources on mortgage fraud.

The Department of Housing and Urban Development (HUD): Besides providing information about homeownership, you can contact a HUD counselor. They are trained to spot mortgage fraud, and may have resources for contacting the appropriate authorities in your area.

The Federal Bureau of Investigation (FBI): The FBI does investigate financial crimes involving mortgage fraud, so you can contact them if you feel there is a major fraud scheme going on in your neighborhood or town.

Final thoughts: Lying on a loan application is not worth it

Lenders have a great deal of responsibility for making sure loan applicants can repay their mortgages. Besides making sure you have the income, assets and credit to support your loan request, lenders need to verify the documentation provided is valid and verifiable.

There are a number of different reports lenders run to protect themselves from making fraudulent loans, because they can be asked to buy back a loan if an audit by a regulatory agency discovers they didn’t take proper fraud prevention measures. If any housing professional suggests that you omit or lie about something on your application, notify the proper authorities. It’s not worth risking jail time, million dollar fines or becoming unemployable because you lied on a mortgage application.

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Denny Ceizyk
Denny Ceizyk |

Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

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